Personal Finance and Budgeting: How to Create a Budget that Works
Budgeting is a word many people hate. They hear it and instantly think they must sacrifice.
What if that’s not the case? A budget is empowering – it gives your money direction and helps you understand where you stand financially. It may help you save for future goals, pay off debt, or just live within your means.
When you use a budget to your advantage, it’s quite powerful!
How to Start Budgeting
Here’s the problem – most people don’t know where to start.
Without a plan, it’s hard to stay consistent. We’ve uncovered the top three budget plans that most people use successfully and outlined them below.
It comes down to knowing what you bring in and pay out, and what method you’re most comfortable using.
Let’s dive in!
Figure out your Take-Home Pay
First, figure out how much money you bring home. Your salary isn’t how much you bring home. You have to figure in taxes and other automatic deductions.
Make sure you include all income. Do you have a side gig, earn Social Security income, or have other income sources? Include the after-tax value of each source.
Tally up your Expenses
Now it’s time to get honest with yourself. Pull out your last few months of bank and credit card statements. Comb through them and write down all regular and irregular expenses.
Regular expenses are things like housing, utilities, insurance, transportation, and groceries. Irregular expenses are those quarterly, semi-annual, or annual expenses, such as HOA dues, some insurance policies, taxes, gifts, and miscellaneous spending.
Look at the Difference
Look at your total income and expenses. Are you spending more than you bring in each month or are you ahead of the game?
If you spend more than you bring it, see where you can cut back. Where do you overspend? A few common areas include:
- Eating out and entertainment
- Cellphone or internet data packages
- Credit card costs
- Membership costs
Determine if you can cut anything out and/or lower any bills. For example, shop for lower insurance rates or cell phone rates annually. Sticking with the same bill leads to bills creeping up higher without you even realizing it.
If you’re spending too much on dining out, entertainment, or shopping, find alternatives to help you save more.
Choosing the Right Budget Plan
After getting your income and expenses in order, choose a budget plan that resonates with you.
The 50/30/20 plan is the most flexible plan that still keeps you in control.
With this plan 50 percent of your income covers your necessities and/or fixed expenses, 30 percent covers irregular expenses or wants, and 20 percent covers debt payoff and savings.
It offers just enough room to stay on track while having enough flexibility to play with the numbers and spend how you want (within reason).
Your necessities/fixed expenses include things like housing, groceries, utilities, transportation, insurance, and credit card minimum payments. Irregular expenses/wants include anything that doesn’t fall under ‘necessary’ or that you could live without.
The final 20 percent covers extra money to pay off debt and/or money you’ll automatically save in an emergency fund or retirement account.
Over spenders do well with envelope budgeting. It’s more restrictive, but some people need it.
With this plan, you create a budget for each category, such as housing, groceries, utilities, shopping, dining out, insurance, etc.
Ideally, you have a physical envelope for each category and fill it with the appropriate amount of cash. Once you spend the cash in each envelope, that’s it for the month. It’s a great way to keep track of your spending and make more mindful spending decisions.
The zero-based budget is for those that need to see every dollar ‘have a job.’ Accounting for each dollar you bring in ensures that you use your money wisely.
You’ll obviously budget for the fixed expenses, like housing, utilities, food, transportation, and insurance, but, you’ll also budget for things like emergency savings, taxable investments, and retirement funds.
At the end of each month, your account should be at $0 only because you gave every dollar an important job.
Track your Progress
No matter the budgeting program you choose, track your progress. This is the only way to know if it’s making a difference or if changes are necessary.
Whether you track with pen and paper or you download an app (there are many options), track your expenses, and how well the budget works for you.
If you find you’re constantly over budget, it’s time to reassess. Did you choose the wrong budgeting method or are you overspending? Determine where you can make changes and cut yourself some slack.
Just because you set a budget doesn’t mean you won’t make mistakes – we all do. If you learn from those mistakes and make changes moving forward, you’ll create a budget that works for you and not against you.
Always Make Room for Savings
No matter the budget you choose, make sure you always have a line item for savings. Whether it’s a few dollars or 20 percent of your income – every dollar matters. Set up an emergency fund (at least 3 – 6 months of expenses), save for short-term and mid-term goals, and set up a retirement fund so you’re ready to enjoy your golden years when the time comes.
The budget that works for you is the budget you can use consistently. Choose the program that you feel comfortable using and know you’ll listen to when spending decisions come up.
If you try one and it doesn’t work, there’s no blame or shame – try another program until you find the system that helps you stay in control of your money, gets you on the right financial track and sets you up for the future.